Corporate Governance By Professor Cameron A Batmanghlich Ph

Corporate Governance By Professor Cameron A. Batmanghlich (Ph. D) Corporate Governance - Fall 2014 1 -1

Lecture Two Governance and Accountability Corporate Governance - Fall 2014 1 -1

Learning Outcomes • Understanding Who really owns a corporation • Understanding Corporate Purpose: A Societal Perspective • Understanding the Primacy of Shareholder Interests: A Historical Perspective. 1 -3

2. 1 Who really owns a corporation; A legal debate Corporate Governance - Fall 2014 1 -4

Do shareholders own the company? The central issue is whether directors of a public company owe their primary fiduciary duty to its shareholders, or have to consider the prerogatives (duties / privileges) of all the stakeholders? Corporate Governance - Fall 2014 1 -5

Do shareholders own the company? A 1988 ruling by the Delaware courts that “the shareholder franchise is the ideological underpinning upon which the legitimacy of directorial power rests” And that corporate law gives boards the authority to hire and fire management and set the company’s overall direction. Corporate Governance - Fall 2014 1 -6

Do shareholders own the company? This means that since directors are expected to serve as the shareholders’ guardians, shareholders must have the power to replace them. Thus, the fear of being replaced is supposed to make directors accountable and provide them with incentives to serve shareholder interests. Corporate Governance - Fall 2014 1 -7

Do shareholders own the company? An opposing view challenges the widely accepted argument that a company’s primary goal is to maximize shareholder value. “Shareholders do not ‘own’ corporations, ” “They own securities—shares of stock—which entitle them to very limited electoral rights and the right to share in the financial returns produced by the corporation’s business operations Corporate Governance - Fall 2014 1 -8

Do shareholders own the company? Directors, are not merely representatives of shareholders who have a legal responsibility to put investor interests first. Instead, the role of the board is simply and dutifully to seek what is best for the company itself, which means balancing the interests of shareholders as well as other stakeholders, such as management and employees, creditors, regulators, suppliers, and consumers. Corporate Governance - Fall 2014 1 -9

2. 2 Corporate Purpose: A Societal Perspective Corporate Governance - Fall 2014 1 -10

2. 2 Corporate Purpose: A Societal Perspective. Opposing views on the purpose and accountability of the corporation—shareholders versus stakeholders, or private (property) versus public (social and political entity) conceptions of the corporation—have been part of the governance debate for well over 100 years. Corporate Governance - Fall 2014 1 -11

2. 2 Corporate Purpose: A Societal Perspective. Shareholder capitalism, until recently prevalent mainly in the United States and the United Kingdom, holds that a company is the private property of its owners. From a legal perspective, the Anglo- American corporation is essentially a capital market institution, primarily accountable to shareholders, charged with creating wealth by exploiting market opportunities. Corporate Governance - Fall 2014 1 -12

2. 2 Corporate Purpose: A Societal Perspective. Stakeholder capitalism, on the other hand, embodies a more organic view of the corporation in which companies have broader obligations that balance the interests of shareholders with those of other stakeholders, notably employees but also including suppliers, distributors, customers, and the community at large. Corporate Governance - Fall 2014 1 -13

2. 2 Corporate Purpose: A Societal Perspective. EX. Germany’s legal system, for example, makes it clear that firms do not have a sole duty to pursue the interests of shareholders. Under Germany’s system of codetermination, employees and shareholders in large companies hold an equal number of seats on the companies’ supervisory boards, and the interests of both parties must be taken into account in decision making Corporate Governance - Fall 2014 1 -14

2. 2 Corporate Purpose: A Societal Perspective. EX. In Denmark, employees in firms with more than 35 workers elect one third of the firm’s board members, with a minimum of 2. In Sweden, companies with more than 25 employees must have 2 labor representatives appointed to the board. These employee board members have all the rights and duties of other board members. 1 -15

2. 2 Corporate Purpose: A Societal Perspective. Friedman, a Nobel laureate in economics Business is not concerned “merely” with profit but also with promoting desirable “social” ends; that business has a “social conscience” and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers. 1 -16

2. 2 Corporate Purpose: A Societal Perspective. Friedman also claimed that: “there is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud. ” That’s the orthodox view among free market economists: that the only social responsibility a law-abiding business has is to maximize profits for the shareholders. 1 -17

2. 2 Corporate Purpose: A Societal Perspective. Friedman also claimed that: “there is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud. ” That’s the orthodox view among free market economists: that the only social responsibility a law-abiding business has is to maximize profits for the shareholders. 1 -18

Corporate Social Responsibility https: //www. youtube. com/watch? v=E 0 N k. Gt. NU_9 w Corporate Governance - Fall 2014 1 -19

2. 3 The Primacy of Shareholder Interests: A Historical Perspective Corporate Governance - Fall 2014 1 -20

2. 3 Corporate Purpose: A Historical Perspective. During the first part of the 19 th century, the corporation was viewed as a social instrument for the state to carry out its public policy goals, and each instance of incorporation required a special act of the state legislature. The function of the law was to protect stakeholders by making sure corporations would not pursue activities beyond their original charter or state of incorporation 1 -21

2. 3 Corporate Purpose: A Historical Perspective. By the end of the 19 th century, states began to allow general incorporation, which fueled an explosive growth in the creation of companies for private business purposes. In its aftermath, concern for stakeholder welfare gave way to the concept of managing the corporation for shareholders’ profits 1 -22

2. 3 Corporate Purpose: A Historical Perspective. In 1919 the primacy of shareholder value maximization was affirmed in a ruling by the Michigan State Supreme Court in Dodge vs. Ford Motor Company. Henry Ford wanted to invest Ford Motor Company’s considerable retained earnings in the company rather than distribute it to shareholders. The Dodge brothers, minority shareholders in Ford Motor Company, brought suit against Ford, alleging that his intention to benefit employees and consumers was at the expense of shareholders. 1 -23

2. 3 Corporate Purpose: A Historical Perspective. THE RULING: A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the non-distribution of profits among stockholders in order to devote them to other purposes. 1 -24

3. 3 The Modern Corporation and Private Property The authors called attention to a new phenomenon affecting corporations in the United States at the time. They noted that ownership of capital had become widely dispersed among many small shareholders, yet control was concentrated in the hands of just a few managers. 1 -25

3. 3 The Modern Corporation and Private Property Others (Berle and Means) warned that the separation of ownership and control would destroy the very foundation of the existing economic order and argued that managing on behalf of the shareholders was the sine qua non of managerial decision making because shareholders were property owners. 1 -26

THANK YOU! Corporate Governance - Fall 2014 1 -27